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Los Angeles economy; Stockton bankruptcy

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KPCC's business analyst Mark Lacter talks about how Los Angeles is doing as the economy slowly recovers; he also talks about how the city of Stockton could face bankruptcy soon.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, we're seeing the national economy slowly recover... what about the city of L.A.’s budget troubles?

Mark Lacter: We'll get the official numbers in a few weeks when Mayor Villaraigosa presents his budget message, but it looks as if the city will see a small increase in revenue next year - a little over 1 percent - which is partly due to an increase in property tax receipts and it's certainly an improvement
from the recession years when most everything was going down. But it's nowhere near the money brought in before the recession.

Julian: Is it enough?

Lacter: Oh, no. The city is still facing huge budget deficits - as much as $200 million for just next year. It continues to be a case of too much money going out – much of it going to retired public employees – and not nearly enough money coming in. Normally, the inidivudal pension funds are supposed to provide most of these benefits, but they’re not delivering enough money. And if the pension funds can't deliver, the city is on the hook for the balance.

Julian: Yet there's no talk of bankruptcy...

Lacter: Not at this point. The city has managed to handle these deficits but in kind of a sleight-of-hand way: Moving money from one department to another, deferring on payments, borrowing. One maneuver has been to allow city employees to accrue banked overtime, although at some point that’ll have to be paid off. City Controller Wendy Greuel, who is also a candidate for mayor, just releasing a report that's critical of the short-term gimmicks that have been used in balancing the budget - she's been calling for longer-term restructuring of the city finances. Councilman Mitch Englander is also critical of the budget process.

Julian: And the mayor, who’s in Washington DC today?

Lacter: The mayor has tried to work with the public unions to make
things a little easier for the city, but the savings are not nearly enough. Steve, the bureaucracy is so entangled operationally that significant reform is really hard. Of course, it would help if the local economy began a real growth spurt, but that’s not in the cards, for now anyway.

Julian: One city we've been talking about that IS looking at a possible bankruptcy is Stockton. Is it a viable option?

Lacter; For Stockton, perhaps. There's a new state law that requires municipalities to try working out their differences with creditors before filing for bankruptcy – and the city has taken that first step. So now there will be a mediation process that will go on for a while - they'll see if some accommodations can be made.

Julian: Stockton's up north, between Modesto and Sacramento, has about 300,000 residents but maybe not familiar to some of us here in southern California. What does Stockton have going for it?

Lacter: Well, Forbes magazine calls it the most miserable city in America, but in some ways it's not all that different from several other mid-sized cities in the Central Valley that really got whacked by the real estate mess. Stockton’s problems are magnified because of terrible decisions that city officials made over the years, including an overly generous health-care plan for city employees.

Julian: I guess that debt piled up.

Lacter: That's why Stockton is now looking at $760 million in city debt and unfunded liabilities - that's a lot of money for a fairly small city - and there are no great solutions. So it's quite possible they'll wind up filing for bankruptcy protection, which could mean lower retirement benefits. Even that would be a very lengthy and time-consuming process - the city of Vallejo in the Bay Area went through several years of court protection and in the end no one seemed very satisfied with the results.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.